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Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete

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Author Info
Jonathan Eaton
Gene M. Grossman

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Abstract

Free trade is not optimal for a small country that faces uncertain terms of trade if some factors are immobile - ex post, and markets for contingent claims are incomplete. The government can improve social welfare by using commercial policy that serves as a partial substitute for missing insurance markets. Using a combination of analytical and simulation techniques we demonstrate that optimal policy for this purpose will often have an anti-trade bias. We also show that the usual preference by economists for factor or product taxes and subsidies over tariffs and export subsidies may not be justified in this context.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0797.

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Date of creation: Aug 1985
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Handle: RePEc:nbr:nberwo:0797

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rothenberg, Thomas J & Smith, Kenneth R, 1971. "The Effect of Uncertainty on Resource Allocation in a General Equilibrium Model," The Quarterly Journal of Economics, MIT Press, vol. 85(3), pages 440-59, August. [Downloadable!] (restricted)
  2. Eaton, Jonathan & Rosen, Harvey S, 1980. "Optimal Redistributive Taxation and Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 357-64, September. [Downloadable!] (restricted)
  3. Eaton, Jonathan, 1979. "The Allocation of Resources in an Open Economy with Uncertain Terms of Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 391-403, June. [Downloadable!] (restricted)
  4. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December. [Downloadable!] (restricted)
  5. Grossman, Gene M & Shapiro, Carl, 1982. "A Theory of Factor Mobility," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 1054-69, October. [Downloadable!] (restricted)
  6. Eaton, Jonathan & Rosen, Harvey S., 1980. "Labor supply, uncertainty, and efficient taxation," Journal of Public Economics, Elsevier, vol. 14(3), pages 365-374, December. [Downloadable!] (restricted)
  7. Flemming, John S & Turnovsky, Stephen J & Kemp, Murray C, 1977. "On the Choice of Numeraire and Certainty Price in General Equilibrium Models of Price Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 573-83, October. [Downloadable!] (restricted)
  8. Kydland, Finn, 1977. "Equilibrium solutions in dynamic dominant-player models," Journal of Economic Theory, Elsevier, vol. 15(2), pages 307-324, August. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nuno Limão & Arvind Panagariya, 2003. "Why is there an Anti-trade Bias in Trade Policy?," International Trade 0310003, EconWPA. [Downloadable!]
  2. Robert C. Feenstra, 1986. "Incentive Compatible Trade Policies," NBER Working Papers 1977, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Gerda Dewit, 1996. "Export Insurance Subsidisation: Risk Coverage, Strategic Export Promotion or Aid?," Working Papers 9614, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
  4. Barbara Pfeffer, 2006. "Trade Policy and Risk Diversification," Volkswirtschaftliche Diskussionsbeitraege 126-06, Universität Siegen, Fachbereich Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht. [Downloadable!]
  5. J. David Richardson, 1985. "The New Nexus among Trade, Industrial and Exchange-Rate Policies," NBER Working Papers 1099, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Wilfred J. Ethier, 2001. "Unilateralism in a Multilateral World," Tinbergen Institute Discussion Papers 01-033/2, Tinbergen Institute. [Downloadable!]
    Other versions:
  7. Gene M. Grossman, 1984. "International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class," NBER Working Papers 1174, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Ricardo Hausmann & Michael Gavin, 1996. "Asegurar la estabilidad y el crecimiento en una región propensa a las sacudidas: los retos de políticas para América Latina," RES Working Papers 4021, Inter-American Development Bank, Research Department. [Downloadable!]
  9. John T. Cuddington & Hong Liang & Shihua Lu, 1996. "Uncertainty, Trade, and Capital Flows in Sub-Saharan Africa," International Finance 9602002, EconWPA. [Downloadable!]
  10. Ricardo Hausmann & Michael Gavin, 1996. "Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America," RES Working Papers 4020, Inter-American Development Bank, Research Department. [Downloadable!]
  11. E. Kwan Choi & Harvey E. Lapan, 1991. "Optimal Trade Policies for a Developing Country under Uncertainty," Center for Agricultural and Rural Development (CARD) Publications 90-gatt8, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
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  12. Freund, Caroline & Ozden, Caglar, 2004. "Loss aversion and trade policy," Policy Research Working Paper Series 3385, The World Bank. [Downloadable!]
  13. HARVEY E. Lapan & E. KWAN CHOI, 1988. "Tariffs Versus Quotas Under Uncertainty: Restricting Imports And The Role Of Preference," International Economic Journal, Korean International Economic Association, vol. 2(4), pages 35-55, December. [Downloadable!] (restricted)
  14. Svaleryd, Helena & Vlachos, Jonas, 2000. "Does Financial Development Lead to Trade Liberalization?," Research Papers in Economics 2000:11, Stockholm University, Department of Economics. [Downloadable!]
  15. Blackman, Allen & Nelson, Per-Kristian & Mathis, Mitchell, 2001. "The Greening of Development Economics: A Survey," Discussion Papers dp-01-08, Resources For the Future. [Downloadable!]
  16. Raquel Fernandez, 1988. "Tariffs in an Economy with Incomplete Markets and Unemployment," NBER Working Papers 2705, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Michael Webb, 2005. "The conflicting impacts of export fluctuations and diversification programmes," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 14(3), pages 271-280, September. [Downloadable!] (restricted)
  18. Patricia Tovar, 2004. "The Effects of Loss Aversion on Trade Policy and the Anti-Trade Bias Puzzle," Econometric Society 2004 North American Summer Meetings 499, Econometric Society. [Downloadable!]
  19. Richard A. Jensen & Marie Thursby, 1990. "Tariffs with Private Information and Reputation," NBER Working Papers 2959, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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